The private equity market really seems to be heating up this year. A month ago the Carlyle Group raised the largest equity fund ever, and this week Goldman Sachs put together an even bigger one at $8.5 billion.
As I understand it, these funds are put together for the purpose of purchasing companies (recent purchases include retailers, a software company, and a web music distributor). Typically, these purchases are highly leveraged (2/3 debt, 1/3 equity. The companies they buy are held for a period of time with the expectation that they will be resold at a profit.
The prevailing wisdom about the stock market is that returns will be modest in coming years, because market valuations are high. Value investors bemoan the lack of opportunity.
On the other hand, some very savvy financial firms appear to believe that the market offers some appealing opportunities at these valuation levels. I expect that the present level of interest rates also factor into their decisions.
So here's my thesis: isn't the fact that these firms are raising billions to buy up companies bullish for equity markets? It suggests (a) that there are companies which can be purchased now with the expectation of resale at a higher price in the forseeable future, and (b) that the leveraged purchases these funds make will increase demand-side pressure in equity markets.
Ok, fire away. I am no expert in LBO's, and don't propose that anyone change their own strategy based on these developments, but they do give me hope that someday my S&P index funds may see 1250.